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Nathan’s Famous still gets boost from marketing at 100

Huge crowds gather on the sidewalk surrounding Nathan's

Huge crowds gather on the sidewalk surrounding Nathan's Coney Island location about 1950. Credit: Nathan's Archive

The iconic Nathan’s Famous frank celebrates its 100th birthday this year with a summer of nationwide hot-dog-eating contests, prizes and events — the latest in a long tradition of splashy marketing moves for the Jericho-based brand.

Nathan’s Famous Inc. is expanding the brand’s reach far beyond its green, white and mustard-colored eateries, with rapidly growing sales in supermarkets, entertainment venues and convenience stores. The company’s revenue reached $99.1 million in its 2015 fiscal year — a 24 percent increase over the prior year, and more than quadruple its sales a decade earlier.

The company views each ring of the cash register at supermarkets, ballparks and movie theaters not only as a sale, but as a chance to advertise.

“It’s a way of exposing the brand,” said Wayne Norbitz, who retired last year after 26 years as president and chief operating officer. The key to the company’s growth, said Norbitz, who remains a director, is the realization that “you don’t have to build a building to sell a hot dog.”

Nathan’s still serves up grilled hot dogs and crinkle-cut fries at five company-owned restaurants, including its famed Coney Island location, and about 260 franchised eateries located in 23 states and nine foreign countries. On Long Island, Nathan’s operates one company-owned restaurant, in Oceanside, and has 29 franchises, including locations within convenience stores, cinemas and college campuses.

But restaurants are no longer the bulk of its business.

Last year, Nathan’s Famous sold 500 million hot dogs at more than 53,000 stores, snack stands and restaurants around the world, from Mexico City to Moscow. Sales at retail stores and venues such as Regal Cinemas, Auntie Anne’s pretzel stands, Yankee Stadium, Citi Field and convenience stores have grown fivefold in the past 10 years, said Nathan’s chief executive Eric Gatoff.

And, Gatoff said, he expects that growth to continue.

In its fiscal year ended in March 2015, the company earned $18 million in royalties from retail sales, more than double a year earlier. Much of the credit, Gatoff said, goes to its 2014 agreement with meat company John Morrell & Co., a division of industry giant Smithfield Foods. John Morrell, which also makes its own line of branded meats, has begun manufacturing, selling and marketing Nathan’s franks for retail stores and food-service venues such as movie theaters and ballparks.

“The depth of sales and marketing resources they bring to us is just a game changer for us,” Gatoff said of John Morrell, which he said is focusing particular attention on the Super Bowl, Memorial Day, July 4 and Labor Day weekends, in addition to year-round sales. “They’re spending millions on marketing.”

In the nine months ended Dec. 27, Nathan’s total revenue increased 4 percent from the same period a year earlier, to $81.8 million. The company now gets roughly half its profits from retail stores and about a quarter from venues such as movie theaters, ballparks and convenience stores, Gatoff said.

“Everybody knows Nathan’s Famous, whether they live on the East Coast or not,” said Bonnie Riggs, restaurant industry analyst for Port Washington-based market researcher NPD Group. “They’ve done a good job of building awareness and customer loyalty, and that’s what drives your business in today’s marketplace.”

Like others in the fast food industry, Nathan’s faces challenges such as rising labor costs and a growing emphasis on foods perceived as wholesome and natural. It also must contend with higher interest costs because of $135 million in debt it took on last year to pay a large one-time dividend to shareholders.

Nathan’s executives say they are carefully watching consumer health trends, and they called their interest costs manageable. Indeed, the company has weathered challenges ranging from the Great Depression of the 1930s to the Great Recession of 2007-2009 and the 2012 superstorm Sandy, which temporarily knocked out its storied Coney Island stand.

A hot dog stand on Coney Island

The story of Nathan’s is “the story of America, at least the America of the early 20th century, when immigrants would come in, start a business, and with luck and a good product they could succeed,” said Andrew F. Smith, a culinary historian and author of “New York City: A Food Biography.”

Nathan’s, which has been headquartered on Long Island since 1989, got its start in Coney Island in 1916, when Polish immigrant Nathan Handwerker invested $300 in a small hot dog stand. It soon attracted regular customers such as Jimmy Durante and Eddie Cantor, then entertainers at the Coney Island beer garden, Feltman’s, where Handwerker had labored in the kitchen, as well as gangster Al Capone and actor Cary Grant, before he was famous.

Handwerker attracted hordes of beachgoers by setting the frank’s price at 5 cents, half what his competitors charged. His wife, Ida, contributed the frank’s still-secret blend of spices.

Mindful that patrons might worry that the bargain price meant poor-quality ingredients, Handwerker hired men to don medical garb and pose as customers, said Norbitz, who heard the story from Handwerker’s son, Murray, a former company president who died in 2011 at age 89.

While marketing was important, Norbitz said Handwerker never skimped on the quality of his all-beef frank. “Nathan’s was a stickler for quality, so the cut of the beef had to be the best,” said Norbitz.

The Handwerker family took the company public in 1971; in 1987 the family sold Nathan’s to a group of Long Island-based investors, including Howard Lorber, who is executive chairman. The Long Island investors took the company private, then returned to the public market in 1993. Nathan’s shares are traded on the Nasdaq Stock Market. On Thursday, they closed at $44.23, up 72 cents, and are up more than 10 percent in the past 12 months.

The publicity stunt that has brought the most fame to Nathan’s is its Independence Day hot-dog eating contest. The competition took place in fits and starts beginning in 1916, but it really caught fire in the late 1970s, when public relations guru Max Rosey suggested inviting a tabloid photographer. And so, Norbitz recalled with a laugh, “we waited for a couple of [guys] to walk by” and challenged them to a competition.

What followed was an ever-growing media frenzy. Now, thousands gather on Coney Island — and millions more watch on sports network ESPN — as contestants, some of them surprisingly trim, swallow dozens of dogs in 10 minutes.

To mark the company’s centennial, the nickel-a-dog price was set to make a brief reappearance at the Coney Island stand on the Saturday of Memorial Day weekend from 11 a.m. to 2 p.m. The company also plans a summerlong celebration featuring prizes such as a year’s worth of free franks.

Nostalgia and affection for the company’s Coney Island roots give it a lift, said Karen Karp, a food industry consultant based in Southold and Manhattan.

However, Karp said, consumers increasingly favor healthful, locally sourced foods.

“It’s a big company driving a lot of procurement,” Karp said. “It would be very interesting to me to see an iconic, historic brand reinvigorate themselves for the time, either in terms of sourcing or health or both.”

Nathan’s is keenly aware of those trends, said Gatoff, a former partner at entertainment law firm Grubman, Indursky & Schindler PC, who grew up on Long Island and has been chief executive since 2007.

He said Nathan’s offers lighter fare such as grilled chicken sandwiches, “to avoid the ‘veto vote’ in the car” by health-conscious family members. And it is researching ways to purchase more produce from local sources, Gatoff said.

Like other restaurant chains, Nathan’s will need to adjust to new federal regulations mandating overtime pay for more workers, as well as New York’s $15 minimum wage, which is being phased in by various dates statewide, including 2021 on Long Island.

The result is likely to be fewer hours for many employees, as well as higher prices for food, Gatoff said: “Good operators will have to find a way to manage their staff.”

The company also must pay for the bonds it issued in March last year to fund a $25-per-share special dividend. Moody’s classifies the bonds as speculative, rating the debt at B3. The debt carries an interest rate of 10 percent, reflecting investors’ perception of the bonds’ risk.

The payout caused Nathan’s stock price to decline by an amount roughly equal to the dividend, from its closing price of $73.56 the previous day to just over $48 on the morning it was paid. That happens any time a company pays a dividend, said Matthew Coffina, editor of Morningstar’s StockInvestor newsletter: “It’s just taking money out of one pocket and putting it in the other,” he said.

Nathan’s reported interest expense of $3.7 million for the three-month period ended Dec. 27, up from zero a year earlier That higher interest, incurred to make the big payment to shareholders, cut into its profits. Nathan’s net income was $432,000 for the quarter, a decline of nearly 81 percent from its $2.2 million in profits a year earlier.

The company has traditionally returned capital to shareholders by buying back stock, Gatoff said. But after Nathan’s announced its agreement with John Morrell, the stock price surged from the $40s into the $70s, making stock buybacks less sensible, he said.

By issuing bonds, Gatoff said, “we were pulling forward the cash flow that we were expecting” from the new agreement.

In its report on the bonds, Moody’s called the John Morrell agreement a benefit for the company.

The agreement with John Morrell is accelerating Nathan’s shift toward being a retailer as well as a restaurateur.

Nathan’s is taking a similar path to Starbucks, “which sells a lot of their bottled drinks in supermarkets,” said Joel Evans, a professor of marketing at Hofstra University’s Frank G. Zarb School of Business. “It just spreads the name and gives them a different audience.”

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